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Cover story: Strategies shift as buyers again face competition

- - Thursday, November 29, 2012

House hunters in the Washington area, eager to lock in a housing payment at today's low mortgage rates, are bumping up against an unexpected obstacle: competition.

While not a problem for every buyer, bidding wars are firing up the market in a variety of locations and price ranges. The main driver for multiple offers is an insufficient supply of homes to meet increasing demand.

According to Real Estate Business Intelligence (RBI), a division of MRIS, there were 1,416 active listings in the D.C. area in October 2012. Last year, there were 2,219 active listings -- and the average number of listings in October for the past five years was 2,506.

"Buyers have to change their attitude about the way the market is," said Carol Hooks, a Realtor with Coldwell Banker Residential Brokerage in Alexandria. "Many still think it's OK to make a low offer and to ask for closing-cost assistance, but they really need to come up with a good, realistic offer and be prepared to pay their own closing costs."

Pre-shopping prep

Not all buyers will face multiple offers for the home they want to buy, but Eldad Moraru, a Realtor with Long & Foster Real Estate in Bethesda, said buyers should be prepared to compete before they find the home they want to buy.

"All of your financing should be in order before you look for a home," Mr. Moraru said. "You need to go fully through the mortgage-approval process, not just get a lender's prequalification letter.

"Your cash for your earnest-money deposit and your down payment should also be ready to go. A lot of buyers will have some money in stocks to sell and some money in a checking account and will tell me they need a few days to get it together," he said. "You need to have that money consolidated and accessible in one account before you find a house."

Your choice of lender is extremely important in any real estate transaction, but it becomes even more crucial if you must compete with other buyers.

"You need to shop around and pick the lender you know will be able to provide you with a new approval letter within an hour of finding the home you want to make an offer on," Mr. Moraru said.

"Some lenders will tell you it will take a day or so, but if you have gone through the mortgage-approval process to determine your maximum loan amount, a lender should be able to generate a lender letter with the address of the property and the exact amount you are offering so that you can attach it to your offer."

Ms. Hooks said listing agents and sellers often are concerned that the financing will fall apart before settlement, so she suggested finding a reputable local lender.

"Buyers should clear up any credit issues and make sure they have the cash for closing costs and a down payment," she said. "The bigger your down payment, the more realistic it is that your loan will go through."

Phil Bolin, a broker with Re/Max Allegiance in Alexandria, said buyers not only need a local, accessible lender but also need to educate themselves about the market so they can make a decision quickly.

"Buyers need to know what they want in terms of the house and the location," Mr. Bolin said. "They should look at open houses and get as much information as possible ahead of time so they understand home values and what to expect in terms of the condition and price of a home."

Mr. Moraru said an experienced Realtor can help buyers recognize value.

"It's important to make an offer with your head and not your heart," he said. "The more education you have, the easier that is."

Making an offer

Once you've found the place you want to buy, you need to make the strongest possible offer. While some sellers will choose to accept an offer based solely on money, most choose the contract that appears most likely to result in a completed sale.

"Once you find the home you want, you need to be decisive and move quickly," Mr. Moraru said. "Your buyer's agent should ask the listing agent when they are reviewing offers. If you move fast enough, you can have a home inspection before you make an offer, and then you can waive the home-inspection contingency in your offer."

Mr. Moraru said your listing agent should find out what's important to the seller, such as flexibility on the move-in date or settlement date. A buyer willing to rent back the house for two months so the seller's children can complete the school year may win out over a higher offer from a buyer who needs to move into the home immediately.

"Buying a home when there's competition is a lot like dating," Mr. Bolin said. "You need to win on both looks and personality. The 'personality' part is the fundamental issue of financing and down payment, but the 'looks' part doesn't cost you anything. It can be as simple as making sure there are no mistakes in your contract. If there are mistakes or missing items in your offer, you don't look like a serious buyer."

Mr. Bolin said he always includes an offer summary sheet with his buyers' contracts to make it easier for sellers and listing agents to see a concise version of the main points of the offer.

Along with the offer, you'll need to include an earnest-money deposit. Mr. Moraru said a deposit of 3 percent of the sales price is customary in the D.C. area, so a deposit of 10 percent makes a statement to the sellers that you are a serious buyer.

The type of loan you choose also can make a difference to the seller. Generally, FHA and VA loan appraisals are more stringent than appraisals for conventional loans, Mr. Bolin said.

"A conventional loan with a down payment of at least 10 percent makes a stronger offer than an FHA loan," Mr. Bolin said.

In addition to cash, buyers can make their offer more appealing by eliminating contingencies.

"If you've been given a full preapproval for a mortgage of $850,000 and you're only borrowing $750,000, you can be pretty certain that you can waive the financing contingency," Mr. Moraru said.

Buyers with plenty of cash may want to consider waiving the appraisal contingency, particularly if they are fairly confident about the market value of the property they wish to buy, Mr. Moraru said.

"If you don't have enough cash to make up the difference between the appraised value and the sales price, then you can't opt to waive the appraisal because you would be expected to pay the full price," Mr. Moraru said.

Some buyers also offer an escalation clause, which automatically establishes a higher offer above a particular threshold.

"We're not seeing as many escalation clauses these days, though, because of the concern that the appraisal won't match the new sales price," Ms. Hooks said.

Mr. Moraru said buyers are better served by offering a price above the list price rather than using an escalation clause.

"If you have a good sense of where the house price will end up, it's better to just offer that rather than make a lower offer and plan to escalate," he said. "In order to determine the price you should offer, you should ask yourself: If you lose this house at this price, how will you feel? If you win the house at the maximum offer price, how will you feel? If you'll feel like you overpaid, then you did."

Mr. Bolin said buyers need to be careful not to push past their maximum housing budget.

"Sometimes a Realtor can help buyers avoid overpaying for a property, but sometimes couples will push and pull themselves to avoid getting overexcited and offering too much," Mr. Bolin said.

While having stellar financing and a good knowledge of home values and the seller's desires are all important to buyers in a competitive market, Ms. Hooks said sometimes the simple step of writing a nice letter to the sellers about why you love their home can be enough to push your offer past those of other buyers.